| Homeowners

So downsizing. This is often considered a dirty word for homeowners who envision leaving their lovely, detached property and backyard for cramped life in a condo. However, downsizing is not always related to condo living. Also, it’s not always related to size. You could also look at it as a strategy to downsize your mortgage payments. When we look at all of the factors involved with downsizing, it becomes a bit more complicated to determine when it’s the right time to downsize.


Adding to the confusion is the whole skyrocketing pricing thing. With housing prices in Toronto at an all-time high, you might be thinking now is the time to cash in on your home equity. If you’re asking yourself if now is the time to downsize and make a killing, you might be surprised by the answer. Here’s everything you need to know about downsizing in Toronto right now.


It’s All About Home Equity

Real estate profits are all dependent on your home equity and current home value. Home equity as you might already know, is the share of your home’s value you’d get when you sell your home. So, to simplify, if you paid $500,000 for your house and have paid down $250,000 of your mortgage, right off the bat your home equity is $250,000 ($500,000 – $250,000). However, you also have to consider your home’s current value. If your house is valued at $1 million today and you sold your home for this amount, your home equity is $750,000 ($1 million – $250,000 still owing on your mortgage). If this is your situation, then downsizing now might make sense, depending on the type of home you plan to buy next that is. That brings us to current housing prices.


Considering Toronto Home Prices

When we wrote this blog in November 2021 housing prices were as follows:

  • Detached: 416 – $1,784,979 and 905 – $1,459,803
  • Semi-detached: 416 – $1,322,229 and 905- $1,029,347
  • Townhouse: 416 – $1,025,257 and 905 – $932,815
  • Condos: 416 – $739,647 and 905 – $633,951

In the case where you bought your home many moons ago and you’re sitting pretty on either a mortgage free property, or a mortgage that is almost paid off, you could make a killing for sure. Imagine walking away with upwards of $1.25 million? Nice. Even if you moved into a sweet semi-detached, you could potentially have money left over for other things like your retirement. So in this scenario, you could make a killing if you downsize now.


Not Enough Home Equity

But what if you bought your home not so long ago, paid a higher price and haven’t paid down as much of your mortgage? When you look at the math for that scenario you start to see why this might not work in your favour. For example, if you paid $800,000 for your home, and have only paid down $150,000 on your mortgage, your current home equity is just $150,000. So if you sold your home for $1 million, you first have to pay the balance of your mortgage of $650,000 ($1 million – $150,000 of your equity). This leaves you with just $350,000 ($1 million – $650,000 owing on your mortgage) to go towards your next home. While this is still a nice amount of cash, with today’s high housing prices, your profits don’t go as far. If you wanted a semi-detached for example, you’ll still be looking at a mortgage that is almost as much as your current mortgage. Depending on the neighbourhood you are looking at you can even end up with a higher mortgage thanks to bidding wars. So you have a higher mortgage for a smaller home or you’re paying the same amount for less space. We would always advise against this as it leaves you worse off then you were. In this scenario now is not the time to downsize.


Tricky Interest Rates

One last consideration is mortgage rates. What you pay monthly is very important. Depending on what deal you got on rates for your current home, you might lose money on interest by buying a new home now. Talk to your bank or real estate agent to get a better idea of how much interest will go to the bank if you purchase a home now at current rates. This can make a big difference in how much money you can save over the life of your mortgage. Remember, the older your mortgage, the more money is going towards the principal, as opposed to interest. When you buy a new home, you start again, paying more towards the interest in the first several years. You have to do some scary math here to get a clear picture of where your profits from the sale will go. If the answer is towards interest, it doesn’t really sense to downsize now.


Options to Make Downsizing Work

You have a few options to make downsizing work in the current market even if you haven’t got as much equity in your home:

  1. Relocate: If you’re retiring and aren’t tied to living in Ontario, you could consider relocating to another province. You’ll find extremely affordable homes in lovely locations across Canada that could really provide a nice, quiet lifestyle where you’ll be financially well off. In fact, you don’t even have to be retiring. If your job allows you to work remotely, you can live wherever you like.
  2. Move From the City: While this is also relocating, it’s not quite as dramatic as moving to a new province. The further you are from the city, the more property you’ll get for you loonie. Of course this doesn’t include exclusive areas in cottage country like Lake Rousseau, but you’ll still have lots of charming communities to consider with all the amenities you need. This is also a nice compromise if you have family and friends in the GTA. You’re still within a few hours drive, so you can still enjoy visits, while benefiting from a more affordable lifestyle. It’s all about where you’re willing to live and the lifestyle you want to lead.
  3. Micro Living: If square footage is not as much of a concern for you right now, really downsizing to a much smaller home also allows you to make the most of your profits. There are so many interesting options for micro living from tiny houses to cottages and bungalows to various types of condos that you’re sure to find something that suits your new downsized lifestyle. This is always an option for eco-conscious households looking for a way to reduce their carbon footprint. It’s very cost effective both for purchasing and maintaining your home. Ambitious homeowners might even consider buying a small plot of land and building a custom tiny home. While not for everyone, it could be an excellent solution for the green at heart.


So there you have it. Three options that could make a bit more sense for your downsizing plans.


The Bottom Line

There really is a lot to consider, and a lot of math involved when determining if it makes sense to downsize. If your mortgage is paid off, or you have tons of equity in your home, you’re in a better position for downsizing now. If you paid more for your home, have little equity in your home, or are facing higher interest rates, then downsizing is not for you.


If you want to talk about your home value in the current market, we’re some of the best real estate agents Toronto offers. We’re ready to find solutions to get top dollar for your home and find a smaller home with a smaller mortgage to match! Give us a call at 416.291.7372 or email us at hello@christinecowern.com. We’d love to work with you!